The Berkeley years. Part IX.
My friendship with Janos Kornai.
In 2002, Janos Kornai emailed me that he was retiring from Harvard and returning to Hungary. He was doing a tour to say goodbye to his friends. After seeing Ken Arrow in Stanford, he came to see me in Berkeley.
While Janos had had a big influence on my early work on the socialist economic system, I only got to know him better since visiting Collegium Budapest in late 1993. At the Nobel symposium on the economics of transition that I had organized with Olivier Blanchard in 1999, Janos asked Eric Maskin and me to write a survey article on the issue of the soft budget constraint for the Journal of Economic Literature. Janos had coined the concept of the soft budget constraint as the basis of his magnum opus “The Economics of Shortage”. The idea was that in the socialist economy, state-owned enterprises were never financially constrained when it came to increasing production. Eric Maskin had together with my friend Mathias Dewatripont written the seminal contract-theoretic model of the soft budget constraint as a general commitment problem: an investor would like to commit not to bail out a project, but decides ex post to do so. This is because the initial investment is a sunk cost so that the benefit of refinancing may exceed its cost, even though the total cost may exceed its benefit, thus making it loss-making. I had used various versions of the Dewatripont-Maskin model in the context of transition economies. I already mentioned my work with Yingyi Qian on how fiscal decentralization in China helped harden the budget constraints of State-Owned Enterprises ( https://gerardroland.substack.com/p/the-exciting-1990s-part-iv ). In my 2000 Transition book, I used the Dewatripont and Maskin model to summarize many of the ways budget constraints were hardened or softened during the transition process[1]. There was thus a lot of material for Janos, Eric and me to cover in this survey article. Janos was at times impatient that Eric and I were not progressing fast enough in working on the paper. Janos was more “old school” working on one project at a time while Eric and I were always juggling work on various projects at the same time. Eventually, after one last important push and rewrite from Eric, we were happy with the outcome. As of May 2026, the paper was counting 1861 citations on google Scholar. Eric and I thought that this paper might help give a nudge towards a Nobel prize for Janos, which we thought he amply deserved. Unfortunately, it was not to be.
When he was president of the International Economic Association, Janos asked me and econometrician Laszlo Matyas to be program chairmen for the International Economic Association Congress that took place in Marrakesh in 2005 and for which he was responsible. While the sessions were taking place, we watched on TV with horror the devastation brought to the city of New Orleans by hurricane Katrina.
In 2008, Janos published his memoirs “By Force of Thought” with MIT Press. I was asked to write the review article on the book for the Journal of Economic Literature ( https://www.kornaijanos.hu/media/memories//Memories/mem//english/reviews/eng_reviews/review_roland.pdf ). I knew of course a lot about his research, but it was interesting to learn about his earlier life. Born in an educated Budapest Jewish family, he lost his father and a brother to the holocaust and barely escaped death himself. Like many members of the Jewish intelligentsia, he became a communist after the war and worked for a while as a journalist for the central daily newspaper of the communist party, covering economic issues. He became disillusioned during the Rajk trials from the early 1950s when Stalinist purge trials took place in all Central European countries. In reading the book, I saw a small parallel with my own life. I had also been a journalist for the newspaper of the Belgian’s Worker Party and became disillusioned with communism after the revelations on the Cultural Revolution following Mao’s death. Kornai’s experience as a journalist gave him the material he used in his doctoral thesis Overcentralization in Economic Administration (Oxford University Press, 1958) which was a brilliant but purely inductive synthesis of his observations on the reality of central planning in Hungary. He was punished by the communist regime for these penetrating insights in the aftermath of the repression following the 1956 uprising. He then lived in relative isolation in obscure jobs outside academia. Paradoxically, it is this relative isolation that enabled him to learn modern economics and to publish his well-known 1965 Econometrica paper with Tamas Liptak on two-level planning. The rest is part of the history of economic thought to which he enormously contributed.
After Janos’s retirement, I always went to visit him whenever I went to Budapest. He had bought with his wife Zsuzsa a nice apartment in Buda overlooking the Danube and I had the opportunity of visiting them many times. He loved to sit down and exchange views about life, the world, research, people. He was always inquiring about his former Harvard students that I knew, in particular Yingyi and Chenggang. There were also several celebrations in his honor.
In January 2012, a conference was organized at Corvinus university to celebrate Janos’s 85th birthday. Heddy and I flew all the way from San Francisco to attend the conference. A snow storm in Munich grounding all planes prevented us from arriving on time the eve of the conference, but we managed to catch the first plane out of Munich the next day and arrived a little bit after the opening of the conference. The fact that this conference was organized in Corvinus University was bitter sweet for Janos. Under communism, it was called Karl Marx University. After his Ph.D defense in 1956 and the Soviet repression in Hungary, Kornai was banned from teaching at Karl Marx university but now renamed Corvinus University had welcomed him in his retirement years. This was all the more significant since Orban, after having been reelected in 2010, closed down Collegium Budapest where Janos had been a fellow (see https://gerardroland.substack.com/p/the-exciting-1990s-part-v) as part of his overall policies to crack down on academic independence in Hungary. Janos spoke up since day one against Orban’s authoritarian turn as well as his encouragement of age-old antisemitism in Hungarian society. I remember vividly how Janos and Zsuzsa told Heddy and me on a cold January morning in a coffee shop next to the Danube how after having lived through Nazism and 40 years of communism, experiencing at the end of their life Orban’s destruction of democracy was a source of immense sadness.
In February 2018, another conference was organized, also at Corvinus University, this time to celebrate Kornai’s 90th birthday. Among many foreign speakers, Olivier Blanchard was there. I was surprised to learn that as a student in Paris, Olivier read with enthusiasm Kornai’s Anti-equilibrium book (see https://gerardroland.substack.com/p/going-to-university-1979-1983-part) as a student, as had been the case for me. Olivier, though a mainstream macroeconomist, was quite familiar with Kornai’s work over the years.
In 2017, Orban had passed a law called “Lex CEU” effectively banning the Central European University from Hungary. Central University was an elite university funded by George Soros to introduce high quality education in Central Europe after the fall of communism. Orban could not tolerate its independence as well as Soros’s advocacy for human rights and democracy. Like many other academics, I spent a lot of time trying to mobilize universities to protest the move by Orban. Janos explained to me in detail how Orban was putting the whole Hungarian university system under the control of his government. CEU was eventually forced to move to Vienna.
In 2019, Janos contacted me. He had written a column entitled “Economists share blame for China’s ‘monstrous’ turn” and asked for help in publishing it. He expressed regret over having advised the Chinese government on its transition to the market economy. He observed that China had created a very successful market economy, which had helped reinforce China’s political communist regime. This communist political regime with a capitalist market economy was a “Frankenstein” vying for world hegemony that needed to be contained. He had sent the column to the New York Times but had received no response (The New York Times rarely publishes columns from non-US elites). I then sent the piece to Martin Wolf at the Financial Times. I had participated a couple of times in Beijing in policy panels with Martin and also with Jack Lew who had been Treasury Secretary in the Obama administration. Martin responded right away and graciously helped to publish the article despite having at the time some reservations about the piece (so did I at the time). In hindsight, this column was quite prophetic.
In 2019, I received the painful news that Zsuzsa had passed away. Janos was devastated. His own health deteriorated from then on. The last time I saw him was in a zoom meeting in June 2021 at an event Celebrating Janos where Amartya Sen was also a participant. He was physically quite diminished. On October 18 2021, I received the sad news that he had died. I wrote an obituary for voxeu (https://cepr.org/voxeu/columns/economics-socialism-and-transition-life-and-work-janos-kornai-1928-2021). Another conference was organized in his honor in 2023 where Chenggang Xu, Eric Maskin and I participated along many other speakers.
I miss him a lot. He was an intellectual giant and a man of integrity.
(To be completed)
Janos Kornai came to visit me in Berkeley when he retired from Harvard in 2002.
[1] Budget constraints were hardened when State-Owned enterprises (SOEs) were privatized (but not automatically, depending on certain conditions); under demonopolization when firms can be broken up, making bailout less profitable; under decentralization of credit when banks face liquidity contraints or when investors face conflicts of interests making bailouts more costly; when entry of new sufficiently profitable projects make bailouts non profitable; when banks make investments in ex ante screening of projects also making the financing of new projects more profitable than bailouts; when banks are sufficiently capitalized and engage sufficiently in loan monitoring. Budget constrained were softened when SOEs received more autonomy, prices were liberalized and rationing was abolished, when trade arrears (arrears of payments between firms) created a too big to fail problem. In sum, the issue of soft budget constraints was a major one in all aspects of firm and bank restructuring in transition economies.